When A Secured Loan Makes Sense
at Thursday, January 29, 2009
To this day, the process of getting a loan is sometimes a grueling affair. The problem is, people don't want grueling, they want simple, fast and easy. Unfortunately that's not always possible, and was even less possible back then, where every step of the approval process implied a trip to the local bank branch. Secured loans had always been much less of a hassle, but just like the other loans, you had to physically go to the branch.
Since the World Wide Web started gaining in popularity in the mid-90's, the financial industry has been taking advantage of the many opportunities this medium offers, notably in the area of lending. When it comes to secured loans, the process has really been streamlined. In theory, this is the "safest" type of loan a financial institution can give out: the borrower gives a collateral of equal value to the loan that he/she is applying for, and allows that collateral to be taken away if the loan is not paid off. Thus what happens is that information that pertains to your capacity to repay the loan becomes largely irrelevant.
You will be asked to give general information about yourself and what you do for a living. The current international climate also requires that you undergo a security verification, notably for the source of the funds. From then on, what your lender will most care about will be the information that you'll have to provide that prove that the collateral you're offering belongs to you and is actually exists. The last thing a bank wants to do is grant you a loan on the basis of a non-existing collateral, since it's all they're counting on to prevent losses if for some reason you don't pay them off.
Since you use money that you already have when you're getting a secured loan, many people think it's akin to a scam from the part of financial institutions. Their point is that the money is already yours, what's the reasoning behind getting an interest-bearing loan to get the same amount that you have in your savings? They do raise a valid point, but like many things in life, the answer is situation-specific. So when does it make sense?
1. You're saddled with bad credit. This is the lot of tens of millions of people. If such is the case for you, you know that bad credit lenders will be all too happy to lend you money, but only at very high interest rates because they know that your options are somewhat limited besides them. Yet, if you have savings, you can use them to break free from the ranks of people with bad credit by using them to get secured loans that you pay off on time. You get good interest rates thanks to the collateral you provide, and you rebuild your credit history while repaying the loan.
2. You have no credit file. There have been a number a initiatives lately to help out people who have thin credit files. A thin credit file is a credit file that's either empty or has very little information. Thus there's nothing for the credit bureaus to base on and calculate a credit score. Although having no credit doesn't mean you don't pay off your debts, from a risk management standpoint, potential lenders eye you the same way they do people with bad credit, because they have no idea what kind of a borrower you are. Getting a secured loan can go a long way towards starting to build said credit history.
3. You have an emergency. Sometimes it's not even about your credit. You might have good credit and everything but you're suddenly faced with unplanned and urgent expenses that you must meet. It might feel uncomfortable depleting your emergency savings fund. You might also not want to cash out a CD and forfeit months of interest. In those cases, you can borrow against those funds and pay off the loan over time as your money continues to earn interest.
The biggest drawback to secured loans is that, well, in order to take advantage of them, you have to already have the money. To a lot of people, that's not an option. Besides that, they bring considerable benefits: easy approval, quick disbursement, and rock-bottom interest rates. And as a bonus, they can be used as a tool to improve your credit.
Since the World Wide Web started gaining in popularity in the mid-90's, the financial industry has been taking advantage of the many opportunities this medium offers, notably in the area of lending. When it comes to secured loans, the process has really been streamlined. In theory, this is the "safest" type of loan a financial institution can give out: the borrower gives a collateral of equal value to the loan that he/she is applying for, and allows that collateral to be taken away if the loan is not paid off. Thus what happens is that information that pertains to your capacity to repay the loan becomes largely irrelevant.
You will be asked to give general information about yourself and what you do for a living. The current international climate also requires that you undergo a security verification, notably for the source of the funds. From then on, what your lender will most care about will be the information that you'll have to provide that prove that the collateral you're offering belongs to you and is actually exists. The last thing a bank wants to do is grant you a loan on the basis of a non-existing collateral, since it's all they're counting on to prevent losses if for some reason you don't pay them off.
Since you use money that you already have when you're getting a secured loan, many people think it's akin to a scam from the part of financial institutions. Their point is that the money is already yours, what's the reasoning behind getting an interest-bearing loan to get the same amount that you have in your savings? They do raise a valid point, but like many things in life, the answer is situation-specific. So when does it make sense?
1. You're saddled with bad credit. This is the lot of tens of millions of people. If such is the case for you, you know that bad credit lenders will be all too happy to lend you money, but only at very high interest rates because they know that your options are somewhat limited besides them. Yet, if you have savings, you can use them to break free from the ranks of people with bad credit by using them to get secured loans that you pay off on time. You get good interest rates thanks to the collateral you provide, and you rebuild your credit history while repaying the loan.
2. You have no credit file. There have been a number a initiatives lately to help out people who have thin credit files. A thin credit file is a credit file that's either empty or has very little information. Thus there's nothing for the credit bureaus to base on and calculate a credit score. Although having no credit doesn't mean you don't pay off your debts, from a risk management standpoint, potential lenders eye you the same way they do people with bad credit, because they have no idea what kind of a borrower you are. Getting a secured loan can go a long way towards starting to build said credit history.
3. You have an emergency. Sometimes it's not even about your credit. You might have good credit and everything but you're suddenly faced with unplanned and urgent expenses that you must meet. It might feel uncomfortable depleting your emergency savings fund. You might also not want to cash out a CD and forfeit months of interest. In those cases, you can borrow against those funds and pay off the loan over time as your money continues to earn interest.
The biggest drawback to secured loans is that, well, in order to take advantage of them, you have to already have the money. To a lot of people, that's not an option. Besides that, they bring considerable benefits: easy approval, quick disbursement, and rock-bottom interest rates. And as a bonus, they can be used as a tool to improve your credit.
About the Author:
Jeremy Beckwith is an authority on the certificate of deposit secured loan. Get great financial tips by visiting his finance blog.
